A number of competing bakeries in a trendy downtown neighborhood produce fresh cookies. The demand for cookies

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A number of competing bakeries in a trendy downtown neighborhood produce fresh cookies. The demand for cookies in that neighborhood is P = 16 – 0.25Q, where Q is the dozens of cookies baked each day. The industry marginal cost for these competing bakeries is MC = 2 + 0.25Q. 

a. Solve for the equilibrium price and quantity of cookies in the neighborhood.

b. Who doesn’t love the smell of fresh-baked cookies? Downtown residents and passersby receive $2 worth of benefit from every dozen of cookies baked. Show that bakers are producing fewer cookies than is socially desirable. Then show that cookies are underpriced.

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Microeconomics

ISBN: 9781319105563

3rd Edition

Authors: Austan Goolsbee, Steven Levitt, Chad Syverson

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